Outsource jobs or insource workers? The choice is clear.

The disruptive impacts of globalization initially hammered workers without much education...College students in the United States who major in science, technology, engineering and mathematics – often referred to as STEM fields – definitely face better prospects in the labor market than others do. But even they need to be aware of intensified competition down the road.

Many software engineers and others in the information technology field feel particularly aggrieved about the effects of the H1-B visa program. The computer scientist Norman Matloff, who maintains a Web site on the topic, asserts that [the H1-B program] enables employers to hire younger and less expensive workers, leaving many highly skilled, older programmers in the lurch.

Workers with H1-B visas have a strong incentive to remain with the employer for whom it was issued in order to obtain a green card, allowing permanent residence in the United States, in a timely fashion. As a result, they have relatively little bargaining power.
Professor Matloff, who favors extensive changes to the H1-B visa program, also warns of the growing impact of outsourcing on jobs for computer science majors.

Now, I share some of Norm Matloff's concerns about the H1-B program. The visas force high-skilled immigrants to stay with a single employer in order to get green cards, thus turning these immigrants into a sort of indentured servant class. This should end.

But concerns over the H1-B program should not translate into a general antipathy towards high-skilled immigration. In fact, concern over outsourcing should make us much more supportive of increased HSI.

Reason 1: Taxes. If an American company - say, Microsoft - hires a programmer in Bangalore, the programmer pays income taxes to the Indian government. But if the same Indian programmer moves to San Jose, he pays his taxes to the American government. That means more roads, schools, etc. for America.

Reason 2: Clustering. Skilled workers like engineers and programmers are more productive when they're around a lot of other engineers and programmers. They exchange ideas and cooperate and start businesses together and hire each other. This is why increasing the number of engineers and programmers does not have only the simple, supply-based effect on wages that Econ 101 suggests. Econ 101 says that if you increase the supply of engineers, the wages of engineers will go down. But in the 1970s and 80s, many thousands of engineers moved to Silicon Valley - and yet the wages of engineers in Silicon Valley went up, not down, because of the clustering effect. In fact, clustering is one big reason why, when you grab a programmer out of Bangalore and plunk him down in San Jose, his wages go way up.

These are two reasons why it's better to insource high-skilled workers than to outsource their jobs. If I were a programmer, and I had to choose between competing with an Indian guy making $10,000/yr in Bangalore or the same exact guy making $100,000/yr in San Jose and paying taxes to support my kids' schools, you can bet I'd choose the latter!!

(And this is not even mentioning the beneficial effect of high-skilled immigrants on low-skilled American workers.)

Now, here's one possible reply: "Why choose between outsourcing and immigration? Why not just restrict both? Then native-born high-skilled workers will face very little competition from foreigners at all!"

This would be nice, but I don't think it would work. Because it's not true that America's workers would face no competition from their foreign counterparts in such a situation. This is because a lot of our software and technology companies' sales are in foreign markets; they are exports. We sell software and semiconductors and airplanes and business services to Germany and Japan and Australia and China and the UK. And foreign companies - Taiwanese companies, Indian companies, Korean companies - compete with American companies in every one of those markets, no matter how many immigrants America allows in or how much outsourcing we allow. That is competition that we cannot stop.

Right now, the global software industry and the global semiconductor industry are more-or-less dominated by American companies. But that could change. It changed for cars and TVs and batteries in the 70s and 80s. And if it does change for software and semiconductors and aerospace, and if our markets and immigration system are closed, then high-skilled native-born American workers - no matter how well educated and how well trained - will be in big trouble. Their employers, hobbled by high costs and less able to take advantage of clustering effects, will only be able to sell their wares to the domestic American market, which is less than a fifth of the world.

So I don't think we have the option of closing ourselves to immigration AND restricting outsourcing AND taxing imports. Not if we want to maintain anything like our current standard of living, I mean. Instead, we have to choose between outsourcing our high-skilled jobs or admitting more high-skilled immigrants. I think we should choose the latter.

64 comments:

Nice piece Noah. Reason 1 however may be less important if there are congestion effects. This is certainly the case with local public goods where an increase in population requires more schools, law enforcement, public infrustructure, etc. The idea that skilled workers raise the productivity of other workers that live or work close to them, whose implications for growth were explored among others by Lucas (1988), seems more important.

I also want to add a third reason. Increasing the ratio of skilled to unskilled workers may help moderate the increase in the skill premium that we have witnessed over the last few decades, thus helping reduce inequality.

Your argument is sort of right. There's a shortage of STEM workers globally so employers are hiring wherever they can find them and paying whatever local wages demand. That's the main reason the jobs still exist here despite 10x the cost of India and outsourcing for over a decade. Immigration can definitely impact local wages. Demand for employment isn't just a function of clustering but also education and research centers, both of which could thrive without immigration.

Immigration is worse in other respects as well. American cities, especially places like Silicon Valley and Boston, don't grow to accommodate the immigrants resulting in rising cost of living for those areas. They are willing to live in what Americans could consider substandard conditions (converting living room to a bedroom, family of 4 in a 1-2 bedroom home, etc). That drives up the cost of living, displacing the American workers rather than subsidizing their public infrastructure. That's part of what's driving the growth to places like TX and NC right now.

These aren't arguments against open immigration policies. In the greater context, it's better to increase housing supply than restrict immigration for example. The bigger problem going forward, as the Economist and Time picked up on a year or so ago, is not that we don't allow immigrants to move here but rather that they don't want to move here.

Despite 1/10 the pay, STEM workers in India actually have higher standards of living so a lot of them are choosing to stay or return home now. With the global shortage we're still doing ok but that may end some day. At that point, American workers will be in a lot of trouble because our costs for living, even adjusted for standards, are substantially higher.

The two places that matter right now are housing and healthcare. Despite the poor state of baby boomers, a large amount of wealth was transferred through housing to them in rising housing prices caused in part by artificial housing shortages in tech centers. Healthcare is expensive for a lot of reasons but at a minimum because Indian healthcare workers make much less relative to engineers than American equivalents due to artificial healthcare worker shortages. The difference in both cases is piling up on municipal balance sheets at the moment but that won't last forever and our living standards, while still relatively generous compared to most Americans, are taking a hit in the process as well.

I work in so-called STEM fields and I can tell you that there is an enormous surplus of these people in N. America, particularly in the USA. There is no shortage of job fields anywhere with the massive amount of education industry expansion and continuing neo-liberal dismantling of the economy. However, there are some jobs that pay 20 percent lower, have poor work conditions, etc. that will exclusively hire H1Bs, e.g. my Chinese girlfriend worked at an accounting firm in China town for 30,000/year in Flushing, NY (about a 66 percent discount on a competitive salary). This job was accepted because it sponsors a visa, which has a paltry fee of 2000/year. All PhD programs constitute about 50% F-1 visas, not because Americans don't like math, but because there is no chance of a tenure track, and constantly shrinking chance for a n industry position, must being contracted out to third parties, e.g. Pfizer doesn't even have an in house R and D facility. This ridiculas assertion of not enough STEM workers is laughable. It is a SOP to try to inflate the illusion that a service economy is growing to replace Anglo country's residual industrial sector.

As to Noah's premise of 'wanting tax dollars to stay here', the H1-b is a vehicle to lower worker costs/standards for those jobs not deemed to be outsourceable at this time. It's not an either/or proposition. There is no cognitive competition in this phenomena--I am not aware of any major work or intellectual value-added, in the main, by these overseas investment ventures--it's strictly a non-environmental, non-labor law, low-cost, etc. environment to draw Western dollars, something E. Asian countries are more hesitant to do because their racial hegemony and ideas of national development.

"If an American company - say, Microsoft - hires a programmer in Bangalore, the programmer pays income taxes to the Indian government. But if the same Indian programmer moves to San Jose, he pays his taxes to the American government. That means more roads, schools, etc. for America."

Sure, it's better for America. But even if the visa numbers are increased, why would it be better for Microsoft?

Are you saying that allowing more high-skilled immigration would on its own reduce outsourcing? Or are you saying that the government should simultaneously allow more high-skilled immigration and restrict outsourcing? Because if it's the former, I'm not sure that's realistic. It seems to me that outsourcing and high-skilled immigration fill different needs, in terms of costs and logistics, so allowing more of one won't necessarily decrease the other. If a particular function is a good candidate for offshoring, marginally increasing high-skilled immigration probably wouldn't tangibly affect that calculation.

"College students in the United States who major in science, technology, engineering and mathematics – often referred to as STEM fields – definitely face better prospects in the labor market than others do"

Doh! If only I didn't suck at science, technology, engineering and mathematics...

Further to previous post, I've read various stuff about mutual benefits of trade - eg Ricardo on comparative advantage. Is this a) bollocks or b) subject to revision in the light of recent research or c) still conventional wisdom?

I used to hold an H1B visa long ago,and I tell you it is not all that is cracked up to be. First of all, the cap has steadily shrunk (almost halved) in the last decade. Currently I think it is around 80,000 if you include advanced degree caps. It can only be extended up to six years after which you either apply for a greencard, which has to be sponsored by the company and takes more than 3 years as a process with no certainty of success (in fact plenty are denied). So in any six year period the total number of H1B holders is around 240,000 which amounts to around 0.16% of the total american workforce. It is a non-issue if you are concerned about displacing american workers, and it has all the benefits that Noah mentioned above. There is a net benefit to the american taxpayer since all H1B holders pay into social security and not all of them will draw ss. Most H1B's are issued to large companies and they do pay the prevailing wage, at least from personal experience. Given that the headache of procuring H1B's is getting more intense, there is no benefit to hiring non-americans other than the gain in skills.

. So in any six year period the total number of H1B holders is around 240,000 which amounts to around 0.16% of the total american workforce.

A more appropriate measure might be the 7,685,000 STEM workforce so H1B holders would be 3.1% of that ( All foreign born are about 25% of STEM). By the same token STEM workers are only 5.1% of the US workforce hence the negative impact of H1B or immigrant competition on them, if any, could be discounted.

Most H1B's are issued to large companies and they do pay the prevailing wage, at least from personal experience

H1Bs must be paid the prevailing wage by law. Moreover, 'prevailing wage' is a flexible term and 90 percent of H-1B IT wages were below the median US wage for the same occupation.

Given all this I am not sure what the concern is....

The argument H1B versus immigrant is that the H1B system transfers power to the employer in workplace issues other than wages. It is also alleged that H1B holders are not paid fairly.

H1B visa may have concentrations within STEM. This paper from an advocacy group says "Assuming allH-1B beneficiaries between FYs 2008 and 2011 remained employed six years (the maximumtime allowable), H-1B workers would account for nearly 22 percent of the computer-relatedworkforce and nearly five percent of the engineering workforce."

I went to the website you quoted above to check that seemingly inflated number of 650,000. Any neutral observer might have concluded, after reading the website tagline "Low Immigration, Pro Immigrant", that the estimate should be taken with a rock of salt. Nonetheless, digging a bit deeper and checking the link the website itself provides to the report by the gov't, you read:

" Therefore the total number of approved petitions in any given fiscal year exceeds the actual number of aliens who are provided nonimigrant status as H1B...."

The person who provided the estimate conveniently left this fact out and over estimated the number of H1B's.

Furthermore, even the one estimating that number claims:

"Definition. The objective of this exercise is to estimate the number of aliens who, having obtained H-1B status, were alive and in this nation, either in that status or in another legal status, on September 30, 2009"

So this number includes those who were H1B's but remain in the country due to some other legal status.

The fact of the matter is, no matter how you slice it, once the cap is reached, it cannot be exceeded. There may be some one year extensions, but I doubt they would more than double the total number of H1B's as this website claims.

I then went to the paper from the advocacy group, and found out it was the AFL-CIO, and stopped reading after their headline:

You seem to be taking the 80,000 a year cap number and multiplying by three. This ignores two important groups:1. Employee's of H1B exempt organizations (higher education, some non-profit research, government research, etc.. I've seen figures for this around 30,000 a year but nothing official).2. H1B renewal. You state once the cap is reached, it cannot be exceeded. However the the US government says that renewals are not subject to the cap. If the cap remained steady at 85,000 and if (big if) all cap-H1B stayed for six years we would have a steady state of 510 000 cap-H1B in the country plus 180, 000 non-cap. This is undoubtedly high. The sum of all H1B visas (initial+extended+renewed) 2008-2010 was 683,513. Some of those extensions were for less than three years so the number in the US in 2010 would be less.

there is no correlation between job shortages and H1-b. I work in a very saturated medical profession that requires years of post grad education. However, H1-b visas are still granted by the thousands. It is very easy to get around the law justifying the visa. I've seen these visas approved for restaurant work...Given that the worker is tied to his boss for years, it's more akin to indentured servitude--only better, as the worker pays for his own way to America.

I agree with you, Dr. Noah Smith, that immigration reform in the United States would be the wise thing to support the S.T.E.M. labour supply. However, what is your opinion of the state of America's education system, Dr. Smith? For high school, did you study at a public institution or a private institution? I was always private-schooled myself.

Interesting post. What are the impacts of changes in immigration policy after 9-11 on the US economy? There were a lot of new travel restrictions that made it more difficult for immigrants. After 2001, students going to destinations other than the US surged. How much did the restrictions alter the landscape and encourage talent to remain offshore?jonny bakho

When do we get the benefits of outsourcing or increasing immigration for economists? Since the advantage of such policy is so clear. For that matter, why have any US jobs at all? If they are all in India think about the clustering that could happen and the benefit then!

You are getting them. Look how many foreigners hold academic positions in economic departments. Tuition would be higher and research would be of lower quality at American universities if that were not the case.

They are a cost component, so I am sure they play some role. To reverse the question, if faculty took a 20% pay cut across the board, would that not allow schools to lower tuition, or at least offer more financial aid?

No, faculty costs are a minor component of schools. Most courses are taught by adjuncts and PhD candidate students for minimum wage in programs that will not lead to jobs due to oversupply of educational institutions. Case in point, several university graduate student programs are unionizing, as their stipend does not pay for room and board. Conversely, administrative positions have ballooned by 300 percent in 20 years (while faculty postions have increased by 20 percent, and I can assure you that the education industry has increased by more than 20 percent.)Foreign professors would unlikely fail to add value to a university for the fact that to be hired in the social sciences are the ones that toe the line influenced by libertarian think tanks and Austrian school folks, which is what gets published and brings in the think tank and corporate dollars, as evidenced by this website's fetishization of said economics in the context of a third decade of economic hell.

Your argument suggests that the whole economy works like software--to wit, that our only hope of growth is in export industries. This is not true. It stacks the deck against the real problem, which is our ridiculous trade regime. This is and has been managed by our globalist corporations as a bargaining chip--free access to American markets in exchange for being allowed to invest in rapidly growing foreign economies. This is good for the bottom lines of the S&P 500 but not so hot for America, which is treated as a cash cow. In the eyes of corporate execs, why should they support school funding, infrastructure investments, etc.?

Until America gets control of its own trade policy back from corporations whose agendas are far from aligned with those of the American people -- that is, starts managing its trade as intelligently and aggressively as, say, China -- we will continue to struggle. Plot trade as a fraction of GDP, the trade deficit as a fraction of GDP, and GDP growth and see if that graph makes you a confirmed "free trader." I doubt it.

Economists have much to answer for in their religious adoration of "free trade."

This post makes no sense whatsoever. There is no religious adoration for "free trade". There is theory (e.g., Ricardo's comparative advantage, Krugman's new trade theory) and there is evidence (Frankel and Romer, 1999) highlighting the positive impact of trade on standards of living. Otherwise countries would benefit from imposed embargos, and isolated North Korea would be one of the best places to live in. If anyone has much to answer, that is you!

By the way, since you (and Romney, and Obama) mentioned China, you may want to read this. http://www.washingtonpost.com/world/asia_pacific/us-exports-to-china-boom-despite-trade-tensions/2012/03/01/gIQAB2Rs5R_story.html

Ah, no. there is advantageous trade and disadvantageous trade: E. Asia protects its economy and we don't, hence large trade deficits and the Asian Tigers, which are the only nations to industrialize in the 20th Century.

"And this is not even mentioning the beneficial effect of high-skilled immigrants on low-skilled American workers"

Are you saying here that high-skilled immigrants provide a net benefit to low-skilled Americans? Seems unlikely. Obviously it's an empirical question, but consider this quick back of the envelope pro-con analysis: PRO: high-skilled immigrants will increase American productivity, which might seem good for consumers EXCEPT that as larry mishel, Krugman and others have noted --See http://krugman.blogs.nytimes.com/2012/04/28/where-the-productivity-went/ -- the fruits of increased productivity in America now go almost exclusively to the very rich. On the other hand, CON: high-skilled immigrants increase unemployment for high-skilled Americans, which presumably causes a trickle down effect as college grads go work at starbucks and people who could've gotten jobs at starbucks now can't.

I have heard of studies (sorry, no cite) that cities with a higher proportion of high wage jobs also lift wages for low-skilled jobs. However, it would need detailed analysis to find out if the latter wage lift is eaten by higher living costs or not.

Andrew I'd say "you're kidding, right"? except it seems clear that you're not kidding. Take a look at this Reuter's article showing that half of the top start ups in the U.S. today were started by [high-skilled] immigrants. You have to assume that even hi-tech startup companies have net benefits to low-skilled Americans, because those companies and employees require all sorts of low-skill services.

It's unfortunate that more news like this doesn't make it through. I suspect it's because of the din surrounding illegal immigration.

There are so many pros and cons to immigration that I have a hard time figuring out if the current net is positive or negative for the native work force.

Re: your 2 reasons, the first is weak and the second is irrelevant.

1) The taxes paid by these immigrants is relatively insignificant in the grand scheme of things.

2) Of course clustering is valid and significant. But those clustered can be native. The point is really orthogonal to a pro-immigration argument.

Reasons of questionable validity weaken rather than strengthen your case.

I still contend that first order effects of immigrants - at any skill level - can only be positive if those immigrants provide something that the native population lacks. Otherwise you are simply swapping out an employee.

In early U.S. history, the population was small relative to the area and opportunities available, so the net benefits of sheer numbers were manifest. Later, immigrants took undesirable jobs, like coal mining [a pro-immigration argument you hear even now, especially from right-wingers.]

However, the current H1-B situation clearly favors employers, vis-a-vis native skilled labor. Even with reforms this will still be true as natives are competitively disadvantaged. I see this as similar to having a Wallmart in town - the overall standard of living is lowered, while the corporate segment is further enriched. This is the first order affect, and it is negative.

I'm not impressed by the argument of your final paragraphs, either. Immigration does nothing to alleviate the international competition you refer to. So I also rate that information as true, but irrelevant.

You are attempting to construct a practical pro-immegration argument, but none of your reasons are compelling.

Immigration has been a great positive throughout much of U.S. history. But what is true in certain times and places is not necessarily true in different times or places. Now, with unemployment stubbornly high and mis-guided austerity ruling the economic landscape, you need to come up with a better and more relevant set of pro-immigration arguments if you want your conclusion to be correct and meaningful to the current U.S. situation.

kinda ironic that the noah's post about outsourcing was typed on an entirely outsourced computer, monitor, keyboard, mouse, *everything* produced outside the USA.

Gleefully bought on a sale, or very cheap (<$2K typically), but it's a great *deal* you see. Of course, no one wants to pay the full cost of USA production, with labor and environmental and non-sweatshop laws ($5K for dell anyone?) but that's...OK.

A computer low-tech support job that a 14 year old can do ? Oohh, evils of h1b and outsourcing!

why is it ironic? Noah was smart. He identified the last guild in America, the tenure faculty position, worked his butt of to secure an actual faculty position instead of being some poor, sad post doc somewhere or a McKinsey consultant scrambling to find the latest insider information he can peddle to someone else and hope he survives the next round of redundancies and now he can engage in the same'free markets for all, lifetime employment for me' Tyler Cowen-type arguments. Preaching, without having to bear the costs of practicing.

I'm gratified that you think I worked hard in grad school. But, I have to tell you, A) there are very few postdocs in econ (few big grants to support them), and B) a McKinsey consultant who started at 22 would be making a lot more than me by now, and would have a lot more money saved too!

Also, the competition from immigrants for faculty positions at U.S. universities is incredibly strong. Academics are not protected from immigrants as are doctors and lawyers. Those professions, btw, have guilds.

Well sure, if you used your physics to program trading robots you'd be a billionaire. But as a generic McKinsey guy? What if you get fired? Employment for life that requires a max of 30 hours of teaching a week > higher salary for 4 years before unemployment.

You must be joking. Any job in consulting for an economics Ph.D. with good credentials pays twice as much as an academic position. Moreover, at McKinsey you have zero teaching. It is all research (which is what most universities evaluate you on anyway).

I disagree. The Dell would still be 2000 dollars in the U.S. The difference is that the profit margin for Dell would be lower. American consumers can't travel out of the country for the cheapest deals; we are a captive market. I suppose a free marketeer would posit that the extra profit for Dell would be reinvested into the economy for more turnover. This, of course, is also false. Since there is less aggregate demand (no U.S. Dell workers and Indian workers unable to buy Dell product), the extra profits would be invested in financial vehicles with the resulting bubble burst destroying the economy.

Noah was smart enough to know what ideology to adhere to to receive employment in today's universities.

Anonymous, you could not be more wrong. Most of the value added to the $1K cost of Noahs PC was added right here in the US. Intel probably did all of the hardware, and it runs software produced by MS. They are the ones that ended up with most of the profit from the machine. The OEMs end up with crumbs, especially so on the lower end models.

Does America really need to import workers when between 8 and 14% of the population is unemployed? why not take some of those precious tax dollars wasted on the F-35 or some other crap, white elephant projects and train yourself a whole army of new tech guys. I'd find your argument much more compelling with unemployment rates at 5% but now?

Anonymous, go here http://www.bls.gov/emp/ep_chart_001.htm/ and check the unemployment rates by level of education. You will see that among Bachelors holders the unemployment rate is in fact 5%, and is quite lower for holders of Masters, Professional, and Doctoral degree. There is great heterogeneity in the labor market, and one has to look at the details to devise smart policies.

The graph also confirms what Noah said earlier. Having a professional degree is more lucrative than having a PhD, especially if you end up in academia.

No they don't! Here is a graph from 2010, when unemployment was actually higher. http://www.demos.org/data-byte/2010-unemployment-rates-age-and-educationAmong Bachelors it is 5% for the group 25-34, as well as the group 35-64.

CA, that also does not control for what jobs these degree holders have. For instance, it is common knowledge that most law grads don't work in law anymore and are strapped with six figure debt with menial labor. So yeah, those law grads may be employed, but in what capacity and for what income? Higher ed is quickly becoming as negative in youth's common mind, as Wall Street workers are for the general population.

Noah, has anyone looked at the effect of importing increased numbers of foreign physicians to bring down the cost of health care in this country? Would these factors you are discussing above have an effect on the health care market?

I was in LA last weekend for my grandpa’s 90th birthday. All the grandchildren had to perform for him so I did a dance performance. Check it out!

Honestly, I’m not that happy with this performance. I was tired from dancing in my cousin’s performance before this, and I didn’t have much time to rest. I don’t think I did justice to the choreography. I just thought I’d share since I got a lot of comments saying I should dance to Wedding Dress.

Tracklist Big Bang VNbig bangfor the mix I made with the choreography:Kanye West – Power (remix) choreography by Keone MadridTaeYang – Wedding Dress choreography by Shaun Evaristo and Lyle BenigaUsher – More choreography by Keone MadridSe7en – Digital Bounce choreography by Keone Madrid

On top of this, I danced to Jay Park – Abandoned with my little cousin. He was too shy to dance on his own so I offered to be in his performance with him. Watch it here!